Home Equity May Keep the IRS Off Your Back

By Gina Pogol
Mortgage Credit Problems Columnist

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If Line 76 (Amount You Owe the IRS) of your 2006 1040 is a huge ugly number, don't run screaming into the street. And don't put your head in the sand and ignore the problem--the IRS can file a tax lien against your home if you do.

First, the IRS does offer several payment options. If you are capable of paying the balance owed within 30 to 120 days, the easiest form of resolution is to request an extension of time to pay. You can do this by using the Online Payment Agreement option on the IRS Web site. While you still have to pay interest and penalties on your unpaid balance, you pay less than if you pay in installments, and much less than if you ignore the problem!

The IRS offers installment plans for paying overdue taxes--for a price.

If you owe $25,000 or less, the IRS might approve an installment payment plan. Apply online or file IRS Form 9465. Keep in mind that there will be interest (the Federal Short Term rate Plus 3%--almost 8% as of this writing), plus penalties (1/2 % of the unpaid balance for every month or part of a month it remains unpaid).

You can also use a credit card to pay taxes owed--and pay a "convenience fee" for the privilege, plus credit card interest. The IRS will take payments from Visa, MasterCard, Discover, and American Express--up to your credit limit. If you have bad credit, this could be a very expensive option and, of course, your credit card interest rate can increase.

Home equity may be the best way to finance your tax obligations. The fees for setting up a home equity loan are generally low, the rate is probably less than your credit card companies charge, and you may pay less than the IRS interest plus penalties. In addition, you can get a fixed rate and avoid surprises--and no interest rate increases or penalties as long as you make your payments on time.

Don't ignore this problem. The IRS can file a lien against your home; it's a public record and can trash your credit. If you are trying to get past a bad credit history, a lien will not help. You will not be able to refinance your mortgage or sell your home without clearing this obligation. It's far less expensive to take care of your tax problem now by using your home equity.


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